nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2010‒10‒16
seventeen papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Demographic Change in Models of Endogenous Economic Growth. A Survey. By Klaus Prettner; Alexia Prskawetz
  2. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
  3. Economic Growth and Environmental Policy with Short-lived Governments By Francisco M Gonzalez; Itziar Lazkano; Sjak Smulders
  4. The End of an Era? The Medium- and Long-term Effects of the Global Crisis on Growth in Low-Income Countries By Chris Papageorgiou; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
  5. Does inequality in health impede growth? By Grimm, M.
  6. From an agrarian society to a knowledge economy: Portugal, 1950-2010 By Álvaro Santos Pereira; Pedro Lains
  7. Growth and Welfare under Endogenous Lifetime By Maik T. Schneider; Ralph Winkler
  8. Recent Credit Stagnation in the MENA Region: What to Expect? What Can Be Done? By Heiko Hesse; Raphael A. Espinoza; Adolfo Barajas; Ralph Chami
  9. A Classical-Marxian Model Of Education, Growth And Distribution By Amitava Krishna Dutt and Roberto Veneziani
  10. Inequality and Growth in a Knowledge Economy By Kunal Dasgupta
  11. Monetary Transmission of Global Imbalances in Asian Countries By Il Houng Lee; Woon Gyu Choi
  12. Cyclical Behavior of Inventories and Growth Projections Recent Evidence from Europe and the United States By Jens R. Clausen; Alexander W. Hoffmaister
  13. Public Expenditure Policy in Bolivia: Growth and Welfare By Carlos Gustavo Machicado; Paul Estrada; Ximena Flores
  14. Exports,growth and causality. New evidence on Italy: 1863-2004 By Barbara Pistoresi; Alberto Rinaldi
  15. Consumption Paths under Prospect Utility in an Optimal Growth Model By Reto Foellmi; Rina Rosenblatt-Wisch; Klaus Reiner Schenk-Hoppé
  16. The Global Financial Crisis and its Impact on Emerging Market Economies in Europe and the CIS: Evidence from mid-2010 By Marek Dabrowski
  17. The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study By Maher Hasan; Jemma Dridi

  1. By: Klaus Prettner; Alexia Prskawetz
    Abstract: The purpose of this article is to identify the role of population size, population growth and population ageing in models of endogenous economic growth. While in exogenous growth models demographic variables are linked to economic prosperity mainly via the population size, the structure of the workforce, and the capital intensity of workers, endogenous growth models and their successors also allow for interrelationships between demography and technological change. However, most of the existing literature considers only the interrelationships based on population size and its growth rate and does not explicitly account for population ageing. The aim of this paper is (a) to review the role of population size and population growth in the most commonly used economic growth models (with a focus on endogenous economic growth models), (b) discuss models that also allow for population ageing, and (c) sketch out the policy implications of the most commonly used endogenous growth models and compare them to each other.
    Keywords: Demographic change, endogenous R&D, economic growth
    Date: 2010–10
  2. By: Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii)the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth; volatility; business cycle; monetary policy
    JEL: O42 E32 E52
    Date: 2010–08
  3. By: Francisco M Gonzalez; Itziar Lazkano; Sjak Smulders
    Date: 2010–10–01
  4. By: Chris Papageorgiou; Catherine A. Pattillo; Nicola Spatafora; Andrew Berg
    Abstract: This paper investigates the medium- and long-term growth effects of the global financial crises on Low-Income Countries (LICs). Using several methodological approaches, including impulse response function analysis, growth spells techniques and panel regressions, we show that external demand (ED) shocks are not historically associated with sharp declines in output growth. Given existing evidence that LICs were primarily impacted by such a shock in the global financial crisis, our analysis provides some optimism on the chances that LICs will avoid a protracted period of slow growth. However, we also show that there seem to be persistent output losses associated with ED shocks in the medium-run. In terms of policy implications, our analysis provides evidence that countries with lower deficits, lower debt, more flexible exchange rate regimes, and a higher stock of international reserves are more likely to dampen the effects of an ED shock on growth.
    Keywords: Demand , Economic growth , External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Low-income developing countries ,
    Date: 2010–09–07
  5. By: Grimm, M.
    Abstract: This paper investigates the effects of inequality in health on economic growth in low and middle income countries. The empirical part of the paper uses an original cross-national panel data set covering 62 low and middle income countries over the period 1985 to 2007. I find a substantial and relatively robust negative effect of health inequality on income levels and income growth controlling for life expectancy, country and time fixed-effects and a large number of other effects that have been shown to matter for growth. The effect also holds if health inequality is instrumented to circumvent a potential problem of reverse causality. Hence, increasing access to health care for the poor can make a substantial contribution to economic growth not only through its effect on life expectancy but also through its effect on reduced health inequality.
    Keywords: health inequality;health gradient;economic growth
    Date: 2010–05–01
  6. By: Álvaro Santos Pereira; Pedro Lains
    Abstract: This paper surveys the main features of Portuguese economic growth in the last half century, with a particular emphasis on the period after the return to democracy in 1974. It shows that significant structural change and capital deepening were the chief sources of growth in the Portuguese economy until the mid 1970s. From then onwards, human capital accumulation and productivity growth were the main reasons behind Portugal’s economic fortunes. Growth declined between these two phases, as in the rest of Europe. In Portugal, it slowed further after 1990. After surveying the main causes of the slowdown of the Portuguese economy in the last decade, Portugal’s main human capital indicators are compared to other European and OECD economies. While Portugal has made a remarkable transition from an agrarian society to an industry- and service-based economy, the country still has not been able to successfully move on to a knowledge-based economy. Such a transition, however, is instrumental to spur economic growth on and to improve productivity.
    Keywords: Economic policies, Economic growth, Human Capital, Portugal
    JEL: N14 O43 O52
    Date: 2010–10
  7. By: Maik T. Schneider; Ralph Winkler
    Abstract: We develop a perpetual youth model to investigate how longevity affects economic growth and welfare. Life expectancy is determined by individuals' investments in healthcare. We find that improvements in the healthcare technology always increase the steady state growth rate. Although the effect is small, even for large increases in longevity, welfare gains may be substantial depending on the type of the technological improvement. We identify two externalities associated with healthcare investments and provide a condition when healthcare expenditures are inefficiently low in the market equilibrium. Finally, we discuss our results with respect to alternative spillover specifications in the production sector.
    Keywords: economic growth; endogenous longevity; healthcare expenditures; healthcare technology; quality-quantity trade-off
    JEL: O40 I10 J10
    Date: 2010–09
  8. By: Heiko Hesse; Raphael A. Espinoza; Adolfo Barajas; Ralph Chami
    Abstract: This paper examines the recent credit slowdown among Middle Eastern and North African (MENA) countries from three analytical angles. First, it finds that, similar to other regions and to its past history, a credit boom preceded the current slowdown, and that a protracted period of sluggish growth is likely going forward. Second, it uncovers a key role played by bank funding (deposit growth and external borrowing slowed considerably) but whose effect was frequently dampened by expansionary monetary policy. Third, bank-level fundamentals - capitalization and loan quality - helped to explain differences in credit growth across banks and countries.
    Keywords: Bank credit , Banking sector , Credit expansion , Cross country analysis , Economic growth , Middle East , Monetary policy , North Africa ,
    Date: 2010–09–27
  9. By: Amitava Krishna Dutt and Roberto Veneziani (Universty of Notre Dame, Queen Mary University of London)
    Abstract: This paper develops a classical-Marxian macroeconomic model to examine the growth and distributional consequences of education. First, the role of education in skill formation is considered and it is shown that an expansion in education will promote growth and have beneficial distributional effects within the working class, but it will redistribute income from workers to capitalists. Second, the model is extended analyze the broader political economic consequences of education on class relations and class conflict. The model suggests the importance of a progressive type of education rather than one which weakens the power workers, for it allows for equitable growth outcomes which improve the position of workers as a whole and reduces inequality within workers. Finally, the model shows that education leads to multiple equilibria and it stresses the importance of providing suitable incentives to workers for taking advantage of greater education access, without which the economy can be caught in a low-skill trap. JEL Categories: E2, E11, O41, J31.
    Keywords: education, growth, distribution.
    Date: 2010–09
  10. By: Kunal Dasgupta
    Abstract: We develop a two sector growth model to understand the relation between inequality and growth. Agents, who are endowed with different levels of knowledge, select either into a retail or a manufacturing sector. Agents in the manufacturing sector match to carry out production. A by-product of production is creation of ideas that spill over to the retail sector and improve productivity, thereby causing growth. Ideas are generated according to an idea production function that takes the knowledge of all the agents in a firm as arguments. We go on to study how an increase in the inequality of the knowledge distribution affects the growth rate. A change in the distribution not only affects the occupational choice of agents, but also the way agents match within the manufacturing sector. We show that if the idea generation function is sufficiently convex, an increase in inequality raises the growth rate of the economy.
    Keywords: Inequality, growth, idea generation, matching, knowledge
    JEL: O30 O40 O41
    Date: 2010–09–30
  11. By: Il Houng Lee; Woon Gyu Choi
    Abstract: The paper explores the linkages between the global and domestic monetary gaps, and estimates the effects of monetary gaps on output growth, inflation, and net saving rates using panel data for 20 Asian countries for 1980-2008. We find a significant pass-through of the global monetary gap to domestic monetary gaps, which in turn affect output growth and inflation, in individual emerging market and developing countries in Asia. Notably, we provide evidence that the global monetary condition is partly responsible for the current account surplus in Asia. We also draw implications for monetary policy coordination for global rebalancing.
    Keywords: Asia , Balance of trade , Capital flows , Economic integration , Economic models , Export competitiveness , Globalization , Inflation , Monetary policy , Production growth , Reserves , Savings ,
    Date: 2010–09–15
  12. By: Jens R. Clausen; Alexander W. Hoffmaister
    Abstract: In the United States and a few European countries, inventory behavior is mainly the outcome of demand shocks: a standard buffer-stock model best characterizes these economies. But most European countries are described by a modified buffer-stock model where supply shocks dominate. In contrast to the United States, inventories boost growth with a one-year lag in Europe. Moreover, inventories provide limited information to improve growth forecasts particularly when a modified buffer-stock model characterizes inventory behavior.
    Keywords: Business cycles , Cross country analysis , Europe , Forecasting models , Manufacturing sector , Production growth , United States ,
    Date: 2010–09–14
  13. By: Carlos Gustavo Machicado (Institute for Advanced Development Studies); Paul Estrada (Institute for Advanced Development Studies); Ximena Flores (Institute for Advanced Development Studies)
    Abstract: It has been widely documented that fiscal policy can promote economic growth, when it is based on an efficient provision of pubic capital. But little work has been done, in Bolivia, in relation to the macroeconomic and sectoral impacts of increasing public investment in infrastructure. This paper develops a Dynamic Stochastic General Equilibrium (DSGE) model for a small open economy with five sectors: Non-tradable or services, importable or manufacturing, hydrocarbons, mining and agriculture. The model is parameterized and solved for the Bolivian economy and several interesting scenarios are simulated by changing government expenditures, taxes, country risk, Total Factor Productivity, effectiveness of public capital and terms of trade. This analysis is relevant for the Bolivian economy, because the government is using fiscal policy as one of its main tool to attack poverty and aims to put public investment as the foremost instruments to promote growth and welfare.
    Keywords: Fiscal Policy, Infrastructure, Multisector Growth Model
    JEL: E62 H54 O41
    Date: 2010–05
  14. By: Barbara Pistoresi; Alberto Rinaldi
    Abstract: This paper investigates the causal relationship between real export and real GDP in Italy from 1863 to 2004 by using cointegration analysis and causality tests. The outcome suggests that in the period prior to WW1 the growth of the Italian economy led that of exports, while in the post-WW2 period the causal relationship was reversed with the expansion of exports that determined the growth of the Italian economy.
    Keywords: Export led growth hypothesis; unit root tests; cointegration analysis; Granger – causality
    JEL: F43 O11 N1 N7
    Date: 2010–09
  15. By: Reto Foellmi; Rina Rosenblatt-Wisch; Klaus Reiner Schenk-Hoppé
    Abstract: This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital.
    Keywords: Ramsey growth model; prospect theory; loss aversion; optimal consumption
    JEL: E21 O41
    Date: 2010–08
  16. By: Marek Dabrowski
    Abstract: Emerging market economies were major beneficiaries of the economic boom before 2007. More recently, they have become victims of the global financial crisis. Their future development depends, to a large extent, on global economic prospects. Today the global economy and the European economy are much more integrated and interdependent than they were ten or twenty years ago. Every country must recognize its limited economic sovereignty and must be prepared to deal with the consequences of global macroeconomic fluctuations. The statistical data for 2009 provides a mixed picture with respect to the impact of the crisis on various groups of countries and individual economies. On average, Central and Eastern Europe experienced a smaller output decline than the Euro area and the entire EU while the CIS, especially its European part, contracted more dramatically. However, there was a deep differentiation within each country group. Looking globally, richer countries, which are more open to trade and in which the banking sector plays a larger role and which rely more on external financing, suffered more than less sophisticated economies, which are less dependent on trade and credit (especially from external sources). With some exceptions, the previous good growth performance helped rather than handicapped countries in the CEE and CIS regions in the crisis year of 2009. The post-crisis recovery has been rather modest and incomplete. It remains vulnerable to new shocks (like the Greek Fiscal crisis), the danger of sovereign default and other uncertainties. Full post-crisis recovery and increasing potential growth will require far going economic and institutional reforms on both national, regional (e.g., EU) and global levels.
    Keywords: global financial crisis, emerging-market economies, European Union, Economic and Monetary Union, Central and Eastern Europe, Commonwealth of Independent States, sovereign debt crisis, global policy coordination
    JEL: E44 E63 F32 F36 F42 G15 H63
    Date: 2010–10
  17. By: Maher Hasan; Jemma Dridi
    Abstract: This paper examines the performance of Islamic banks (IBs) and conventional banks (CBs) during the recent global crisis by looking at the impact of the crisis on profitability, credit and asset growth, and external ratings in a group of countries where the two types of banks have significant market share. Our analysis suggests that IBs have been affected differently than CBs. Factors related to IBs‘ business model helped limit the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to a larger decline in profitability in 2009 compared to CBs. IBs‘ credit and asset growth performed better than did that of CBs in 2008-09, contributing to financial and economic stability. External rating agencies‘ re-assessment of IBs‘ risk was generally more favorable.
    Keywords: Banking systems , Banks , Competition , Credit expansion , Financial assets , Financial crisis , Global Financial Crisis 2008-2009 , Islamic banking , Markets , Profit margins , Risk management ,
    Date: 2010–09–03

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